ALBERT EDWARDS: If I'm right, the US stock market will fall 75%

Nervous
traders on the Frankfurt stock exchange in
1993.REUTERS/Joachim
Herrmann

There are cynics, there are doomsayers, and then there's Albert
Edwards, the Societe Generale economist who is in a league almost
of his own.

Edwards' most recent call is that if the US economy plunges into
a recession led by weak manufacturing output, stocks will be
worth about a quarter of what they're priced at now.

It's a heavy-duty prediction.

On Tuesday the S&P 500 was at 1,938.68. Edwards sees it
possibly passing the low of 666 it hit during the 2008 financial
crisis and ending up at just 550.

The main thrust of the thesis is that central bankers inflated
asset prices after the 2008 crisis and didn't let stocks hit the
lows they should have done.

Central banks also caused a huge debt bubble to expand in the
emerging markets and China, which is now pressuring
emerging-market currencies to devalue, which could lead to a
deflationary spiral and a US recession.

Now that central banks have used up their ammunition to prop up
stocks, asset prices will fall dramatically if the recession does
hit. Stocks will be valued at seven times earnings.

And Edwards thinks the US is on the brink. Weak manufacturing
data is the canary in the coal mine.

When an economy is hurtling towards recession it is almost always
the manufacturing sector that takes the less volatile services
sector by the hand and leads it into a recessionary underworld.

Here's the chart:

Societe Generale

Edwards carried on with the doom and gloom, adding:

If I am right and we have just seen a cyclical bull market
within a secular bear market, then the next recession will
spell real trouble for investors ill-prepared for equity
valuations to fall to new lows. To bottom on a Shiller PE of 7x
would see the S&P falling to around 550.

I will repeat that: If I am right, the S&P would fall to
550, a 75% decline from the recent 2100 peak. That obviously
will be a catastrophe for the economy via the wealth effect and
all the Feds QE hard work will turn dust.

That is why I believe the Fed will fight the next bear market
with every weapon available including deeply negative Fed Funds
rates in addition to more QE. Indeed, negative policy rates
will become ubiquitous.

Most believe a 75% equity bear market to be impossible. But
those same people said something similar prior to the 2008
Global Financial Crisis. They, including the Fed, failed to
predict the vulnerability of the US economy that would fall
into deep recession, well before Lehmans went bust in
September 2008.